Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared at Project Syndicate.
June 26, 2024 — Lethal heat waves this month hit the US and other regions throughout the Northern hemisphere, including the eastern Mediterranean, India, and Southeast Asia. June will probably mark the 13th consecutive month of average global temperatures that exceed all observations in records going back to 1850. The primary explanation is, of course, that emissions and concentrations of Greenhouse Gases (GHGs) have in recent years increased even more rapidly than had been feared.
- A pleasant surprise
In one area, however, progress in the fight against global climate change has been greater than had been expected. Use of solar power and other sources of renewable energy in the US and the European Union has risen rapidly. The beginnings of an historic shift from internal combustion engines to electric–powered vehicles (EVs) have multiplied the importance of the switch to solar and wind sources of electric power. The increased demand for renewable energy and EVs has in turn been driven by big drops in the real prices of solar panels, wind turbines, batteries, and EVs.
In the US, one factor underlying the shift has been subsidies to clean energy, particularly solar, wind, and EVs, in President Joe Biden’s Inflation Reduction Act, which was signed in 2022, with further details announced June 18. An even bigger factor, however, has been declines in the world prices of solar panels and EVs driven substantially by Chinese exports. Worryingly, recent expansions in the US and EU of tariffs on imports of environmentally beneficial equipment threaten to derail this progress.
While numbers for the cost of the energy transition are inherently slippery, the global capital investment needs in the power sector alone are estimated at $1.3 trillion per year on average between 2021 and 2050. Western countries have demanded that China bear its fair share of the costs. Yet, their trade policies are starkly at odds with the stated objectives.
- New import barriers
The perversely disproportionate targeting of imports of renewable energy equipment by the US and EU goes back more than ten years. But it has gotten worse under the Trump and Biden Administrations.
On May 14, the US White House announced its decision (under a “section 301” trade remedy) to raise tariffs sharply on many imports from China, including solar cells, lithium-ion batteries, and electric vehicles, the last to a prohibitive 100%. Such protection will make it difficult to achieve Biden Administration targets which call for renewables to constitute 80 percent of energy by 2030 and for EVs to constitute half of all new cars sold then.
Some Chinese production of photo-voltaic cells has shifted to Southeast Asia, in response both to rising costs in China and to tariffs imposed by the US and EU. The US International Trade Commission recently decided, in a June 7 vote, to pursue claims by some US solar manufacturers who seek anti-dumping and countervailing duty protection against producers in Southeast Asia. This move comes despite opposition from US firms that buy the equipment as inputs to their business of developing and operating solar energy domestically.
Meanwhile, on June 12, the European Commission announced provisional tariffs on Chinese-made EVs, to take effect in July, in response to unfair subsidies. The new EU tariffs, while not prohibitive, average 31 %, substantially higher than those on its imports of conventional autos from other trading partners.
- Macroeconomic goals
It is true that Chinese prices of solar panels and EVs are low not just because of low labor costs and economies of scale, but also because of government subsidies, e.g., in the form of cheaper credit. This leads most American and European politicians to support the blocking of these cheap exports. But why do they want to charge the cost of clean-energy subsidies to their own taxpayers or national debts, in place of charging the cost to Chinese taxpayers? Remember, they wanted China to pay its fair share of the cost of fighting climate change. Logically, one could imagine that Western governments might have refused to subsidize the energy transition unless the Chinese government did so as well!
It may well be that selling climate policy by its capacity for creating green jobs that are reserved for domestic workers is the most feasible strategy politically. But we should recognize that the argument is political, not economic.
For one thing, green jobs created in the industry that manufactures solar panels are offset by green jobs lost in the sector that installs solar energy, which depends on low-cost equipment for its dynamism. Similarly, green jobs in EV production are lost when tariffs lead to higher prices for imports of batteries. Furthermore, export jobs of all sorts are lost when China or other trading partners retaliate against import restrictions.
Anyway, with US unemployment below 4 % ever since 2022, inflation is the primary concern these days, not employment. Removing the tariffs is the surest way that Western governments could have a downward impact on prices of energy and transportation, and thereby on inflation. Yet another respect in which international trade could lower the costs of the green transition, if we let it.
This post written by Jeffrey Frankel.
“The increased demand for renewable energy and EVs has in turn been driven by big drops in the real prices of solar panels, wind turbines, batteries, and EVs.”
One could only imagine the tirades from CoRev over this had this troll not been banned.
“Removing the tariffs is the surest way that Western governments could have a downward impact on prices of energy and transportation, and thereby on inflation. Yet another respect in which international trade could lower the costs of the green transition, if we let it.”
Agree 100% especially in light of a compelling case.
I agree wholeheartedly. Ala Trump, Biden could say “I’m going to build a wall of solar panels and wind turbines and make the Chinese pay for it.”
Instead we have Sino war hawks like trade representative Katherine Tai fighting her war against China on the backs of US consumers. “I’m really tired of being called a protectionist,” she whines.
If you don’t want to be called a protectionist, stop acting like a protectionist.
The most important Biden Cabinet member you don’t know
Vox’s Dylan Matthews sits down with US trade representative Katherine Tai
https://www.vox.com/policy/357191/katherine-tai-united-states-trade-biden-trump-tariffs
“I’m really tired of being called a protectionist,” Katherine Tai, President Joe Biden’s trade representative and a leading architect of his confrontational economic approach to China, told me on Monday.
Given what Biden’s opponent has been saying lately, I empathize. Former President Donald Trump reportedly told Republican lawmakers he wants an “all tariff” policy, in which all federal taxes would be replaced with taxes on imports. In the near term, Trump has committed to a 10 percent tariff on all imports from any country. Next to proposals like that — which would explode consumer prices and make the tax code far more regressive — Biden and Tai sound like free-traders.
But compared to the bipartisan consensus that prevailed until Trump took office, I think “protectionist” is fair. Tai and Biden have continued many of Trump’s tariffs from his term, in defiance of World Trade Organization (WTO) rebukes. This spring saw a flurry of new Biden tariffs targeting China, most notably hitting electric vehicles and batteries.
Tai and the administration see themselves as charting a new course, reversing anti-worker trade policies of the past. “We have shunted workers to the side,” Tai told my colleague and Today, Explained host Noel King, “and we need a domestic and international economic policy that champions the interests of our people.”
But was the previous era really so bad? And are the Biden administration’s policies helping matters?
Global trade helped the poor catch up
From the perspective of humanity as a whole, the period of hyper-globalization starting in 1990 was kind of miraculous. Growth rates in poor countries have sped up markedly, and economists have found they were gradually “converging” toward rich countries. This era saw dramatic reductions in extreme poverty, especially but not solely in China.
For manufacturing workers in rich countries, however, the consequences were grim. Regions and industries in the US exposed to competition from Chinese imports saw declining employment, lower lifetime incomes, and even higher drug overdoses.
At the same time, researchers, including those who identified some of the biggest costs of the “China shock,” have found that the US as a whole benefited from trade with China, albeit modestly. Chinese imports lowered the cost of goods, which raises living standards for poor people in particular, given how much more they have to spend on consumer goods as a share of their income than the well-off.
We could preserve the gains from globalization to both the world and the US while addressing its very real costs by combining open trade with more assistance to workers displaced in the process, such as through the successful Trade Adjustment Assistance program.
However, critics have long contended that the redistribution offered to those who’ve lost out has been, in practice, far too limited.
That’s fed a desire for a more confrontational attitude toward exporters like China, culminating in the tariffs adopted by Trump and largely continued by Biden.
The Trump tariffs didn’t work
In her interview with Vox, Ambassador Tai contended that consumers do not necessarily wind up paying the cost of high tariffs. “When we have started looking back at the last five and six years of prices in the United States, you did not see an automatic increase in prices as a result of tariffs,” she told King. After all, the companies that import goods could simply choose not to pass along the cost of tariffs to their customers.
Except, in reality, they always do pass along the cost. At least four different high-quality studies have looked at the Trump tariffs. All have found “complete” or “almost complete” passthrough: that is, the tariffs were paid for entirely or almost entirely by US consumers in the form of higher prices. Make no mistake: US consumers pay for tariffs we impose.
Meanwhile, Trump’s tariffs did not succeed in creating jobs in the US. They did, however, destroy jobs in agriculture by prompting China to retaliate with its own tariffs, particularly on soybeans and cotton. It’s not clear to me that Biden’s tariff regime will be any more successful at preserving or adding jobs in sectors like battery and auto manufacturing.
Even though they were an economic dud, the researchers found the tariffs were a political success. Areas protected by Trump’s tariffs were more likely to vote for him in 2020.
Though Tai certainly believes in tariffs against China on the merits, you don’t have to be a total cynic to wonder how much political factors are driving the Biden administration’s tariff policy too.
Trade and the world order
Tai has also continued the Trump policy of obstructing appointments to the WTO’s appeals board, and spent much of our interview criticizing the global trade body for inadequately fighting China’s own protectionist policies.
She and her team have been talking a lot about the International Trade Organization, a never-created agency floated 80 years ago by President Franklin D. Roosevelt. They see it as a more pro-worker, pro-environment, and anti-monopoly vision of what international cooperation on trade might look like. FDR, Tai told me, understood the power of “market-based economies coming together to fend off the challenges of fascism on the right and communism on the left.”
As an economic history nerd, I find discussions about FDR’s trade philosophy fascinating, but I did not expect to have one with a White House Cabinet member in 2024. We don’t have an ITO because the US Congress blocked it in 1950. If you look through the institution’s charter, which Tai is right to say includes a lot of tough anti-monopoly and labor rights language, “a lot of it is not something the US Congress would ever sign up for,” Inu Manak, a trade policy expert at the Council on Foreign Relations, says.
Tai is surely thinking about China when she invokes the dream of an organization uniting “market-based economies” against fascism and communism. But at the same time she is defending tariffs on steel and aluminum that apply to almost all countries, not just China.
The Biden administration’s Buy American provisions hurt allies like South Korea too, and Biden is opposing a Japanese company’s effort to purchase US Steel. Is this really just about China, or a more general (here’s that word Tai hates again) protectionist turn?
I hope I’m wrong. Tai has expressed strong support for US trade preferences toward Africa, which gives me some optimism that the new paradigm she represents will treat poor countries fairly. But so far, the new trade approach is mostly reminding me of how much we gained from the old one — and how much we might lose by abandoning it.
Is it possible that green transition is a job creating project, with climate mitigation somewhere down the hierarchy of motives?
Seems that the Massachusetts governor is all about green jobs.
Would it be possible for you to cease and desist with your repugnant trolling?
You never answered any of my questions.
What is wrong with green jobs?
Do we real save money or get good, faster results depending on PRC?
We want our PV, and wind be suitable and to last for years, a domestic capacity….
Hey troll – shut the eff up.
: )
Anything is possible, I suppose. It’s possible that I’m William Shakespeare. Your choice of question, though, suggests you neglected to read this:
https://econbrowser.com/archives/2024/06/northern-hemisphere-land-temperatures-june-may-through-2024
Or perhaps you merely failed to comprehend its meaning.
Does it matter as long as the end result is the same? What motivates politicians might be very different from what motivates me, but as long as their actions end up in the same place I don’t really care about their motives.
Remember when Trump threatened to end NATO because the other nations were not spending 2% of their GDP on defense? Kevin Drum has a must read post:
Joe Biden has been far more successful with NATO than Donald Trump
https://jabberwocking.com/joe-biden-has-been-far-more-successful-with-nato-than-donald-trump/
Check out his discussion and informing diagrams. Let’s just say for now that Trump never achieved his supposed goal but Biden did.
So, Gavin Newsom? He seems to be the flavor of the day.
Frankly, he is the obvious choice. He’s young, white, male, unindicted and can go toe-to-toe with the Orange Menace. I just don’t know if changing horses would improve the odds of sinking Trump.
Before the decision is made, I’m guessing GOP hacks trot out “California in recession” again. The first time it was published could easily have been a set up for just this situation.
https://fred.stlouisfed.org/graph/?g=1k2Y2
California’s real GDP is growing
Now you may have seen unemployment is up slightly but that is because the labor force has grown even more than the increase in employment. Something to do with immigration.
So if Trump tries to claim Cali is in a recession – he would be doing what he is famous for. LYING.
Among Trump’s many lies there was that juvenile debate over golfing like anyone cares. And guess what? Trump lies about that too!
Does Trump lie about how good he is at golf? 5 cheating stories about the ex-president
https://www.msn.com/en-us/sports/golf/does-trump-lie-about-how-good-he-is-at-golf-5-cheating-stories-about-the-ex-president/ar-BB1p2xTN?ocid=msedgdhp&pc=U531&cvid=5123087b801e470baf026d57de453fdb&ei=15
Now, 2.8 is a very impressive handicap. But the fact is, a lot of people dispute the fact that Trump is that good. Sportswriter Rick Reilly, for one, doesn’t believe it. The journalist wrote an entire book about Trump cheating at golf called Commander in Cheat: How Golf Explains Trump, in which he states: “If Trump is a 2.8, Queen Elizabeth is a pole vaulter.” Reilly previously told CNN in an interview: “He cheats like a mafia accountant. He cheats crazy. He cheats whether you’re watching or not. He cheats whether you like it or not.”
An interesting post from the St. Louis Fed regarding decoupling with a discussion about dependence on China for critical sectors.
https://research.stlouisfed.org/publications/economic-synopses/2024/01/19/decoupling-where-it-matters-us-imports-from-china-in-critical-sectors
China, as a supplier, makes economic sense for the US until like Russia for the EU, it doesn’t.
Gee Brucie boy – this decoupling in critical sectors is exactly what Team Biden argues when they form trade policy. But our favorite MAGA moron has chosen to criticize Biden for this repeatedly. Dude – try reading your own link. Maybe you will finally learn something.
Now Trump’s stupid trade war had little to do with decoupling. But Brucie boy never criticizes Trump’s trade policies. Oh that’s right – Brucie boy is a very loyal MAGA moron. Got it!
Can someone remind Brucie boy that Dr. Frankel was writing about imports of solar panels and EVs. Now we all know Brucie boy is a climate change denier so one has to wonder why he thinks these goods are critical given his insanely stupid views on global warming. So one wonders what Brucie is thinking here? Of course I’m not even going to try to figure out what on earth is Brucie’s incredibly warped mind.
Gotta love this sentence in the closing paragraph as it relates to the utter incompetence Bruce Hall’s tenure at Ford:
‘even though semiconductors are a small fraction of car production costs, shortages of semiconductors had a significant impact in this industry.’
Now had Ford had enough semiconductors in inventory, they could have avoided production delays. But the not so smart Bruce Hall was and still is an advocate of Just in Time Inventories!
For climate, the thing that matters is how many EVs, batteries and solar panels China produces – not who buy them. I would even say that if hindering those Chinese products from being sold in US and EU would increase their production worldwide (China+EU+US), that would be an overall positive thing. If it stopped China from developing a monopoly and yield monopoly pricing power, that would also be a positive thing in the long run.
A lot of developing countries needs to EVs, batteries and solar panels for their own use. If the production in China is exported there instead of to the West, it will both replace CO2 emissions from those countries and help them develop a modern energy system. It could be a tremendous saving for poor countries if they could skip building up hydrocarbon infrastructure and go directly to the energy systems of the future.
“If it stopped China from developing a monopoly and yield monopoly pricing power, that would also be a positive thing in the long run.”
It sounds like you are saying China is running some sort of predatory pricing approach. But then what is to stop the US and the EU from subsidizing their sectors right now?
I don’t think they are doing it right now, but with Xi in charge I would not put it past them to do it in the future. He kind of did that with rare earth metals, where they became >95% of the market then began using that monopoly politically and to drive up prices. We could take the approach of subsidizing to keep our own production alive, but that is politically much more difficult than to tax imports.
I’ll grant someone has to pay for those EV subsidies and raising taxes with the goofballs in the MAGA party is difficult. But the economist in me says tax carbon and subsidize green.
Now wait for it – Bruce Hall is about the have an utter melt down.